================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-K/A NO. 1
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-13801
Quality Systems, Inc.
(Exact name of Registrant as specified in its charter)
California 95-2888568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18191 Von Karman Avenue, Irvine, California 92603
(Address of principal executive offices, including zip code)
(949) 255-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 2004: $210,543,000 (based on the closing
sales price of the Registrant's Common Stock as reported in the NASDAQ National
Market System on that date, $50.51 per share).*
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 3, 2005: $415,011,000 (based on the closing sales
price of the Registrant's Common Stock as reported in the NASDAQ National Market
System on that date, $51.30 per share).*
* For purposes of this report, in addition to those shareholders which fall
within the definition of "affiliates" under Rule 405 of the Securities Act of
1933, as amended, holders of ten percent or more of the Registrant's Common
Stock are deemed to be affiliates.
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 13,124,860
(Class) (Outstanding at July 27, 2005)
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K is being filed to include the
information required by Part III, Items 10, 11, 12, 13 and 14.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors and Executive Officers
The names, ages, positions held and business experience of the Company's
directors and executive officers as of July 27, 2005 is as follows:
William V. Botts (69) was a director of Summit Designs from 1996 to 2000.
He served as Chairman and Chief Executive Officer of Summit Designs from July
1999 to April 2000 when the company merged with a larger private company and
became publicly traded on Nasdaq as Innovada which he then served as its
director through July 2002. Since 1993 he has been engaged as an independent
consultant to business in areas related to problem solving, operations,
strategic planning, mergers and/or acquisitions. He has held numerous other past
and present directorship and chairmanship positions with privately held
companies.
Patrick B. Cline (44) currently serves as President of the Company's
NextGen Healthcare Information Systems Division. He served as the Company's
interim Chief Executive Officer for the April - July 2000 period. Mr. Cline was
a co-founder of Clinitec; a company acquired by Quality Systems, Inc. in 1996,
and has served as its President since its inception in January 1994 and
throughout its transition to NextGen Healthcare Information Systems. Prior to
co-founding Clinitec, Mr. Cline served, from July 1987 to January 1994, as Vice
President of Sales and Marketing with Script Systems, a subsidiary of InfoMed, a
healthcare information systems company. From January 1994 to May 1994, after the
founding of Clinitec, Mr. Cline continued to serve, on a part time basis, as
Script Systems' Vice President of Sales and Marketing. Mr. Cline has held senior
positions in the healthcare information systems industry since 1981. Mr. Cline
was appointed a director of the Company by the Board on May 25, 2005.
Maurice J. DeWald (65) is and has been since 1992 the Chief Executive
Officer of Verity Financial Group, Inc., a financial advisory firm. He is a
director of Advanced Materials Group, Inc. and Mizuho Corporate Bank of
California. He was an audit partner/managing partner with the international
accounting firm KPMG, LLP and was with that firm from 1962 to 1991. He holds a
B.B.A. from the University of Notre Dame and has a California C.P.A.
professional certification.
Jonathan Javitt (48) is the Co-Founder of Health Directions, LLC and has
served as its Vice Chairman since 1998. Prior to his current position he was
Co-Founder & Chief Scientific Officer of Active Health Management from 1999 to
2004. Additionally, Dr. Javitt was Co-Founder & Director of Coderyte, Inc. from
1999 to 2004 and Founder & Chairman of Certitude, Inc from 1994 to 1997. Between
2003 and 2005 he served as chair of the Health Subcommittee of the President's
Information Technology Advisory Committee, White House Office of Science and
Technology Policy. He was previously Vice Chairman/Chief Science Officer of
eMedx (later Active Health) from June 1998 to April 2004. He has held senior
executive positions with United Health Care (UNH) from 1997 to 1998 and First
Consulting Group (FCGI) from 2004 to 2005. He holds an A.B. from Princeton
University, obtained his M.D. from Cornell University, and holds a Masters
Degree in Public Health from Harvard University.
Vincent J. Love (64) is the managing partner of Kramer, Love & Cutler,
LLP, a financial consulting group. He was employed by the accounting firm Ernst
& Young from 1967 to 1994, and served as a partner of that firm from 1979 to
1994. He is a member of Counsel, the governing body, of the American Institute
of Certified Public Accountants and an honorary member of the Executive
Committee
3
of the American Arbitration Association. He achieved the rank of Captain in the
U.S. Army, has a B.B.A. from the City College of New York, and is a New York,
Ohio, and Connecticut C.P.A.
Steven T. Plochocki (53) joined Trinity Hospice, a national hospice
provider, as Chief Executive Officer and board member in October 2004. Prior to
joining Trinity Hospice, he was Chief Executive Officer of InSight, a national
provider of diagnostic imaging services from November 1999 to August 2004.
Previously he was Chief Executive Officer of Centratex Support Services, Inc., a
support services company for the healthcare industry and had previously held
other senior level positions with healthcare industry firms. He holds B.A. in
Journalism and Public Relations from Wayne State University and a Master's
degree in Business Management from Central Michigan University.
Sheldon Razin (67) is the founder of the Company and has served as its
Chairman of the Board since the Company's inception in 1974. He served as the
Company's Chief Executive Officer from 1974 until April 2000. Since its
inception until April 2000, he also served as the Company's President, except
for the period from August 1990 to August 1991. Additionally, Mr. Razin served
as Treasurer from the Company's inception until October 1982. Prior to founding
the Company, he held various technical and managerial positions with Rockwell
International Corporation and was a founder of the Company's predecessor,
Quality Systems, a sole proprietorship engaged in the development of software
for commercial and space applications and in management consulting work. Mr.
Razin holds a B.S. degree in Mathematics from the Massachusetts Institute of
Technology.
Louis E. Silverman (46) was appointed President and Chief Executive
Officer of the Company on July 31, 2000. Mr. Silverman was previously Chief
Operations Officer of CorVel Corp., a publicly traded national managed care
services and technology firm with headquarters in Irvine, California. Mr.
Silverman holds a Master of Business Administration degree from Harvard Graduate
School of Business Administration and a Bachelor of Arts degree from Amherst
College. Mr. Silverman was appointed a director of the Company by the Board on
May 25, 2005.
Ahmed Hussein (64) is, and has been since 1997, the Director of National
Investment Company, Cairo, Egypt. Mr. Hussein founded National Investment
Company in 1996 and has served as a member of its Board of Directors since its
inception. Mr. Hussein served as a Senior Vice President of Dean Witter from
1993 to 1996. Mr. Hussein is a director of the following publicly held Egyptian
companies: Nasr City Co., Simo Paper Co., and Nobria Agriculture.
Greg Flynn (47) has served as the QSI Division's General Manager since
April 2000 and as Executive Vice President since August 1998 after serving as
Vice President of Sales and Marketing from January 1996 to August 1998. Between
June 1992 and January 1996, Mr. Flynn served as Vice President Administration.
In these capacities, Mr. Flynn has been responsible for numerous functions
related to the Company's ongoing management and sales. Previously, Mr. Flynn
served as the Company's Vice President, Corporate Communications. Mr. Flynn
joined us in January 1982. He holds a B.A. degree in English from the University
of California, Santa Barbara.
Paul A. Holt (39) was appointed Chief Financial Officer in November 2000.
Mr. Holt has served as the Company's Controller from January 2000 to May 2000
and was appointed interim Chief Financial Officer in May 2000. Prior to joining
the Company, Mr. Holt was the Controller of Sierra Alloys Co., Inc., a titanium
metal manufacturing company from August 1999 to December 1999. From May 1997 to
July 1999, he was Controller of Refrigeration Supplies Distributor, a wholesale
distributor and manufacturer of refrigeration supplies and heating controls.
From March 1995 to April 1997 he was Assistant Controller of Refrigeration
Supplies Distributor. Mr. Holt is a Certified Public Accountant and holds an
M.B.A. from the University of Southern California and a B.A. in Economics from
the University of California, Irvine.
4
The Company's executive officers are elected by, and serve at the
discretion of, the Board of Directors.
Board of Directors Meetings and Related Matters
The Company's Bylaws require that at least a majority of the members of
the Board shall be independent directors. The Bylaws state that an "independent
director" means a person other than an officer or employee of the Company or its
subsidiaries or any other individual having a relationship, which, in the
opinion of the Board, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director. The following persons shall
not be considered independent:
(a) a director who is, or at any time during the past three years was,
employed by the Company or by any parent or subsidiary of the
Company;
(b) a director who accepted or who has a family member (as defined
below) who accepted any payments from the company or any parent
subsidiary of the Company in excess of $60,000 during the current or
any of the past three fiscal years, other than for the following:
i. compensation for Board or Board committee service;
ii. payments arising solely from investments in the
Company's securities;
iii. compensation paid to a family member who is a
non-executive employee of the Company or a parent or
subsidiary of the Company;
iv. benefits under a tax-qualified retirement plan, or
non-discretionary compensation; or
v. loans permitted under Section 13(k) of the Exchange Act
of 1934;
(c) a director who is a family member of an individual who is or at any
time during the past three years was, employed by the Company or by
any parent or subsidiary of the Company as an executive officer;
(d) a director who is, or has a family member who is, a partner in, or a
controlling shareholder or an executive officer of, any organization
to which the Company made, or from which the Company received,
payments for property or services in the current or any of the past
three fiscal years that exceed 5% of the recipient's consolidated
gross revenues for that year, or $200,000, whichever is more, other
than the following:
i. payments arising solely from investments in the
Company's securities; or
ii. payments under non-discretionary charitable contribution
matching programs;
(e) a director of the Company who is, or has a family member who is,
employed as an executive officer of another entity where at any time
during the past three years any of the officers of the Company serve
on the compensation committee of such other entity; or
(f) a director who is, or has a family member who is, a current partner
of the Company's outside auditor, or was a partner or employee of
the Company's outside auditor who worked on the Company's audit at
any time during any of the past three years.
A "family member" for these purposes means a person's spouse, parents,
children and siblings, whether by blood, marriage or adoption, or anyone
residing in such person's home.
During the fiscal year ended March 31, 2005, the Board held 12 meetings.
There were no actions taken by unanimous written consent. No director standing
for re-election to the Board attended less than 75% of the aggregate of all
meetings of the Board and all meetings of committees of the Board upon which he
served.
5
On July 7, 2005, one of the Company's directors, Mr. Ahmed Hussein, filed
a Schedule 13D with the Securities and Exchange Commission and sent a written
notice to the Company informing the Company that, among other things, he may
cumulate his votes and may seek to elect one or more of two independent director
nominees (in addition to himself) at the 2005 Annual Meeting.
In light of Mr. Hussein's schedule 13D filing, on July 18, 2005 the Board
formed a Special Committee. Among other things, the Special Committee has been
delegated all powers of the Board in connection with the solicitation and voting
of proxies at the annual meeting. The Special Committee consists of the
following directors: William Botts, Patrick Cline, Maurice DeWald, Jonathan
Javitt, Vincent Love, Steven Plochocki, Sheldon Razin, and Lou Silverman.
Additionally, Mr. Hussein declined to complete the Company's 2005
Director's Questionnaire. Therefore, this report was prepared without the
benefit of any additional information that may have been included if his
Questionnaire had been completed and returned to the Company.
The Board has an Audit Committee which since September 21, 2004 has
consisted of Messrs. DeWald, Love, and Botts. The Audit Committee is comprised
entirely of "independent" (as defined in Rule 4200(a)(15) of the Nasdaq listing
standards) directors and operates under a written charter adopted by the Board.
The duties of the Audit Committee include meeting with the independent public
accountants of the Company to review the scope of the annual audit and to review
the quarterly and annual financial statements of the Company before the
statements are released to the Company's shareholders. The Audit Committee also
evaluates the independent public accountants' performance and makes
recommendations to the Board as to whether the independent public accounting
firm should be retained by the Company for the ensuing fiscal year. In addition,
the Audit Committee reviews the Company's internal accounting and financial
controls and reporting systems practices. During the fiscal year ended March 31,
2005, the Audit Committee held seven meetings. The Audit Committee's current
charter, adopted January 29, 2004, is included as Appendix A to the Company's
2004 Proxy Statement. The Audit Committee and Board have confirmed that the
Audit Committee does and will continue to include at least three independent
members. The Audit Committee and the Board have confirmed that Mr. DeWald meets
applicable Nasdaq listing standards for designation as an "Audit Committee
Financial Expert" and being for being "independent."
The Board has a Nominating Committee which since September 21, 2004 has
consisted of Messrs. Plochocki, Javitt, and Love. The Nominating Committee is
responsible for identifying and recommending to the Board direct nominee
candidates and is composed entirely of independent directors. The Nominating
Committee will consider candidate nominees for election as director who are
recommended by shareholders. Recommendations should be sent to the Secretary of
the Company and should include the candidate's name and qualifications and a
statement from the candidate that he or she consents to being named in the proxy
statement and will serve as a director if elected. In order for any candidate to
be considered by the Nominating Committee and, if nominated, to be included in
the proxy statement, such recommendation must be received by the Secretary not
less than 150 days prior to the anniversary date of the Company's most recent
annual meeting of shareholders.
The Nominating Committee believes that it is desirable that directors
possess an understanding of the Company's business environment and have the
knowledge, skills, expertise and such diversity of experience that the Board's
ability to manage and direct the affairs and business of the Company is
enhanced. Additional considerations may include an individual's capacity to
enhance the ability of committees of the Board to fulfill their duties and/or
satisfy any independence requirements imposed by law, regulation or listing
requirements.
6
The Nominating Committee may receive suggestions from current Board
members, Company executive officers or other sources, which may be either
unsolicited or in response to requests from the Nominating Committee for such
candidates. The Nominating Committee may also, from time to time, engage firms
that specialize in identifying director candidates.
Once a person has been identified by the Nominating Committee as a
potential candidate, the Nominating Committee may collect and review publicly
available information regarding the person to assess whether the person should
be considered further. If the Nominating Committee determines that the candidate
warrants further consideration, the Chairman or another member of the Nominating
Committee may contact the person. Generally, if the person expresses a
willingness to be considered and to serve on the Board, the Nominating Committee
may request information from the candidate, review the person's accomplishments
and qualifications and may conduct one or more interviews with the candidate.
The Nominating Committee may consider all such information in light of
information regarding any other candidates that the Nominating Committee might
be evaluating for nomination to the Board. Nominating Committee members may
contact one or more references provided by the candidate or may contact other
members of the business community or other persons that may have greater
first-hand knowledge of the candidate's accomplishments. With the nominee's
consent, the Nominating Committee may also engage an outside firm to conduct
background checks on candidates as part of the nominee evaluation process. The
Nominating Committee's evaluation process does not vary based on the source of
the recommendation, though in the case of a shareholder nominee, the Nominating
Committee and/or Board may take into consideration the number of shares held by
the recommending shareholder and the length of time that such shares have been
held.
In compiling the Board slate appearing in the Company's proxy statement
for its 2005 annual meeting, nominee referrals as well as nominee
recommendations were received from existing directors and members of management
- - both solicited and unsolicited. No paid consultants were engaged by the
Company, the Board or any of its committees for the purposes of identifying
qualified, interested Board candidates.
During the fiscal year ended March 31, 2005 the Nominating Committee held
two meetings. The Nominating Committee's current charter, while not posted on
the Company's website, is included as Appendix B to the Company's 2004 Proxy
Statement.
The Board has a Compensation Committee which since September 21, 2004 has
consisted of Messrs. Botts, DeWald, and Javitt. The Compensation Committee is
composed entirely of independent directors, and is responsible for (i) ensuring
that senior management will be accountable to the Board through the effective
application of compensation policies and (ii) monitoring the effectiveness of
the Company's compensation plans applicable to both senior management and the
Board (including committees thereof). The Compensation Committee establishes
compensation policies applicable to the Company's executive officers. During the
fiscal year ended March 31, 2005, the Compensation Committee held nine meetings.
The Board has a Transaction Committee which since September 21, 2004 has
consisted of Messrs. Javitt, Botts, and Plochocki. The Transaction Committee is
responsible for considering and making recommendations to the Company's Board
with respect to all proposals involving (i) a change in control of the Company
or (ii) the purchase or sale of assets constituting more than 10% of the
Company's total assets. The Transaction Committee is composed entirely of
independent directors. During the fiscal year ended March 31, 2005, the
Transaction Committee held five meetings.
Under the Company's Bylaws, if at any time the Chairman of the Board shall
be an executive officer of the Company, or for any other reason shall not be an
independent director, a non-executive
7
Lead Director ("Lead Director") shall be selected by the independent directors.
The Lead Director shall be one of the independent directors, shall be a member
of the Audit Committee and of the Executive Committee, if there is such a
committee, and shall be responsible for coordinating the activities of the
independent directors. The Lead Director shall assist the Board in assuring
compliance with the Company's corporate governance procedures and policies, and
shall coordinate, develop the agenda for, and moderate executive sessions of the
Board's independent directors. Such executive sessions shall be held immediately
following each regular meeting of the Board, and or at other times as designated
by the Lead Director. The Lead Director shall approve, in consultation with the
other Independent Directors, the retention of consultants who report directly to
the Board. If at any time the Chairman of the Board is one of the independent
directors, then he or she shall perform the duties of the Lead Director.
Directors of the Company who are also employees of the Company are not
compensated for their services as directors or committee members. Under the
terms of the Company's Director Compensation Program, all non-employee directors
of the Company shall receive a retainer of $24,000 per year, plus a fee of
$2,000 per meeting of the Board attended. Directors who serve on a committee of
the Board shall receive a fee of $1,000 per committee meeting attended. Board
members traveling cross country to attend a Board meeting or committee meeting
shall receive an additional fee of $1,000. In addition to the cash remuneration
above, each newly elected nonemployee director shall receive 12,000 options to
purchase Common Stock of the Company upon election to the Board. For purposes of
the Director Compensation Program, all nonemployee directors elected at the
September 21, 2004, shareholder's meeting were deemed newly elected. Thereafter,
each nonemployee director reelected to the Board shall receive 10,000 options to
purchase Common Stock of the Company upon each annual reelection date. The
options are priced at the fair market value of the Company's Common Stock on the
date of grant, fully vest in three months from the date of grant, and expire
seven years from the date of grant.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
the directors and officers of the Company and any person who owns more than ten
percent of the Company's Common Stock are required to report their initial
ownership of the Company's Common Stock and any subsequent changes in that
ownership to the Securities and Exchange Commission ("SEC") and Nasdaq.
Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all forms they file in
accordance with Section 16(a).
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the fiscal year
ended March 31, 2005, all of its officers, directors and greater than 10%
shareholders complied with all filing requirements applicable to such persons
with the exception of Ahmed Hussein who failed to file a Form 4 related to a
grant of 7,000 options received on February 11, 2005. Mr. Hussein's Form 4
concerning such grant was subsequently filed with the SEC on July 29, 2005.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our
Chief Executive Officer, Chief Financial Officer (our principal accounting
officer). This Code is posted on our Website located at www. qsii.com. The code
of ethics may be found as follows: From our main Web page, first click on
"company info" and then on "corporate governance." We intend to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or
waiver from, a provision of this Code by posting such information on our
Website, at the address and location specified above.
8
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth certain compensation information for the
three fiscal years ended March 31, 2005, 2004, and 2003, respectively, by the
Chief Executive Officer and the other highest paid executive officers of the
Company (up to four) serving as such at the end of the 2005 fiscal year whose
aggregate total annual salary and bonus for such year exceeded $100,000 (the
"Named Executive Officers").
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Awards
Securities All Other
Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options ($)(1)
- -------------------------------------------------------------------------------------------------------------
Louis Silverman 2005 289,042 144,521 85,000 2,113
Chief Executive Officer and 2004 278,500 139,250 -- 2,000
President 2003 262,937 103,602 -- 2,000
- -------------------------------------------------------------------------------------------------------------
Patrick Cline
President, NextGen 2005 303,245 280,110 125,000 2,929
Healthcare Information 2004 257,500 196,500 18,000 2,000
Systems Division 2003 243,287 118,250 -- 2,000
- -------------------------------------------------------------------------------------------------------------
Gregory Flynn
Executive Vice President, 2005 202,167 20,217 38,750 4,155
General Manager of QSI 2004 187,500 18,810 10,000 4,063
Division 2003 180,000 -- -- 1,800
- -------------------------------------------------------------------------------------------------------------
Paul Holt
Chief Financial Officer 2005 142,051 64,570 33,500 1,962
2004 119,378 28,541 -- 1,479
2003 101,438 27,250 -- 1,197
- -------------------------------------------------------------------------------------------------------------
- ----------
(1) This column reflects amounts attributable to Company contributions to the
Company's Deferred Compensation Plan and/or 401k plan.
9
Option /SAR Grants in Last Fiscal Year
The following table provides information with respect to option grants
during fiscal 2005 to the Named Executive Officers.
- ----------------------------------------------------------------------------------------------------------------------
Potential Realizable Value
Number of Percent of at Assumed Annual Rates of
Securities Total Options Stock Price Appreciation
Underlying Granted to Exercise or for Option Term (#)*
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year (%) ($/Share) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------------
Louis Silverman 85,000 9.58% $38.675 2/10/2012 $1,338,292 3,118,789
- ----------------------------------------------------------------------------------------------------------------------
Patrick Cline 40,000 4.51% $23.335 6/9/2009 $ 257,881 569,850
- ----------------------------------------------------------------------------------------------------------------------
Patrick Cline 85,000 9.58% $38.675 2/10/2012 $1,338,292 3,118,789
- ----------------------------------------------------------------------------------------------------------------------
Gregory Flynn 9,000 1.01% $23.710 9/2/2009 $ 58,956 130,277
- ----------------------------------------------------------------------------------------------------------------------
Gregory Flynn 29,750 3.35% $38.675 2/10/2012 $ 468,402 1,091,576
- ----------------------------------------------------------------------------------------------------------------------
Paul Holt 8,000 0.90% $23.710 9/2/2009 $ 52,405 115,802
- ----------------------------------------------------------------------------------------------------------------------
Paul Holt 25,500 2.87% $38.675 2/10/2012 $ 401,488 935,637
- ----------------------------------------------------------------------------------------------------------------------
Aggregated Option /SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table provides information on option exercises in fiscal
2005 by the Named Executive Officers and unexercised options held by each of
them at the close of such fiscal year. No Named Executive Officer exercised any
stock appreciation rights during fiscal 2005 or held any stock appreciation
rights at the end of such fiscal year. The value of unexercised in the money
options was calculated using the closing share price on the last trading day of
the fiscal year ($42.34).
- --------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at March 31, In-the-Money Options at
Shares 2005(#) Fiscal Year-End ($)
Acquired on Value -------------------------------------------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------
Louis Silverman 254,200 $5,645,481 0 114,972 0 1,385,871
- --------------------------------------------------------------------------------------------------------------------------
Patrick Cline 8,500 $ 172,830 0 142,500 0 1,685,840
- --------------------------------------------------------------------------------------------------------------------------
Gregory Flynn 2,500 $ 50,313 0 46,250 0 536,279
- --------------------------------------------------------------------------------------------------------------------------
Paul Holt 13,000 $ 293,103 0 33,500 0 242,498
- --------------------------------------------------------------------------------------------------------------------------
* Calculations assume that the fair market value on the date of grant
appreciates at the indicated rate, compounded annually for the entire term of
the options, and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.
Stock price appreciation of 5% and 10% is assumed pursuant to the rules of
the Securities and Exchange Commission. The Company cannot provide assurance
that the actual stock price will appreciate over the option term at the assumed
levels or at any other defined level.
10
Employment Contracts and Change of Control Arrangements
Mr. Silverman has an Employment Agreement ("Agreement") with the Company
which details the terms of his employment as the Company's Chief Executive
Officer. The Agreement granted Mr. Silverman a total of 248,520 options which
vest equally over a four year period commencing with the effective date of the
Agreement (July 20, 2000). At the time the Agreement was entered into, Mr.
Silverman was eligible for a cash bonus of up to 50% of his annual base
compensation based on performance goals established jointly between himself and
the Board.
All share amounts set forth in this disclosure have been adjusted to give
effect to a 2 for 1 stock split effective March 28, 2005 and payable to
shareholders of record as of March 4, 2005.
Mr. Silverman's employment may be terminated for any reason by himself or
the Company upon 60 days written notice. Should Mr. Silverman terminate his
employment due to the Company's breach of the Agreement he will be entitled to
(i) a lump sum payment equal to six months base compensation; and (ii) 12 months
worth of accelerated vesting of granted stock options. Should Mr. Silverman's
employment be terminated without cause or by himself for good reason, he will be
entitled to (i) unpaid base compensation and vacation earned and accrued through
his date of termination plus a lump sum equal to six months base compensation,
(ii) any other performance bonus earned and not paid, and (iii) vesting of an
additional 25% of all unvested stock options. Should Mr. Silverman's employment
be terminated due to a "change of control" he will be entitled to (i) unpaid
base compensation and vacation earned plus a lump sum payment equal to six
months base compensation; (ii) any performance bonus earned but not paid; and
(iii) immediate vesting of all unvested options. A "change of control" is
defined as the earliest occurrence of any of the following events: the direct or
indirect sale, lease, exchange or other transfer of 35% of more of the total
assets of the Company, the merger or consolidation of the Company with another
company with the effect that the shareholders of the Company immediately prior
to the merger hold less than 51% of the combined voting power of the then
outstanding securities of the surviving company; the replacement of a majority
of the Company's Directors without the approval of the Board; the purchase of
25% or more of the combined voting power of the outstanding securities of the
Company with the exception of the purchase of securities by Ahmed Hussein or
Sheldon Razin of shares owned by either Sheldon Razin or Ahmed Hussein. The
Agreement also grants immediate vesting of all unvested options should a change
of control occur whether or not Mr. Silverman's employment is terminated.
For options other than those discussed above, the Board, as the
administrator of the Company's 1989 Stock Option Plan and 1998 Stock Option
Plan, has the discretion to accelerate any outstanding options held by the Named
Executive Officers and employees in the event of an acquisition of the Company
by a merger or asset sale in which the outstanding options under each such plan
are not to be assumed by the successor corporation or substituted with options
to purchase shares of such corporation.
Board Compensation
Information regarding compensation of members of the Board is included
above in Part III, Item 10 under the heading "Board of Directors Meetings and
Related Matters."
Compensation Committee Interlocks and Insider Participation
No director or executive officer of the Company is known by the Company to
serve as an officer, director or member of a compensation committee of any other
entity for which an executive officer or director thereof is also a member of
the Company's Board.
11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Beneficial Ownership Table
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of July 27, 2005 by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's current directors
and nominees for director, (iii) each of the Named Executive Officers (as
hereinafter defined), and (iv) all current directors and Named Executive
Officers of the Company as a group:
Number of Shares Percent of
Of Common Stock Common Stock
Name of Beneficial Owner(1) Beneficially Owned(2)(4)(5) Beneficially Owned(3)(4)
- --------------------------- --------------------------- ------------------------
Janet Razin and Sheldon Razin 2,666,440 20.31%
Ahmed Hussein 2,315,800 17.64%
Louis Silverman 47,172 *
Patrick Cline 46,500 *
Jonathan Javitt 16,074 *
William V. Botts 12,000 *
Maurice J. DeWald 12,000 *
Vincent J. Love 12,000 *
Steven T. Plochocki 12,000 *
Paul Holt 6,000 *
Gregory Flynn 2,310 *
All directors and Named Executive Officers as a group
(11 persons, including those named above) 5,148,296 38.87%
- ----------
* Less than 1%.
1. Unless otherwise indicated, the address is c/o Quality Systems, Inc.,
18191 Von Karman Avenue, Suite 450, Irvine, California 92612.
2. Unless otherwise indicated, to the Company's knowledge, the persons named
in the table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable.
3. Applicable percentage ownership is based on 13,115,000 shares of Common
Stock outstanding as of July 27, 2005. Any securities not outstanding but
subject to options exercisable as of July 27, 2005 or exercisable within
60 days after such date are deemed to be outstanding for the purpose of
computing the percentage of outstanding Common Stock beneficially owned by
the person holding such options but are not deemed to be outstanding for
the purpose of computing the percentage of Common Stock beneficially owned
by any other person.
4. Includes shares of Common Stock subject to stock options which were
exercisable as of July 27, 2005 or exercisable within 60 days after July
27, 2005, and are, respectively, as follows: Mr. Razin, 12,000 shares; Mr.
Hussein, 12,000 shares; Mr. Silverman, 29,972 shares; Mr. Cline, 10,000
shares; Mr. Flynn, 2,250 shares; Mr. Holt, 2,000 shares; Mr. Botts, 12,000
shares; Mr. DeWald, 12,000 shares; Mr. Javitt, 12,000 shares; Mr. Love,
12,000 shares; Mr. Plochocki, 12,000 shares; and all directors and Named
Executive Officers as a group, 128,222 shares.
5. All share amounts set forth in this report have been adjusted to give
effect to a 2 for 1 stock split effective March 28, 2005 and payable to
shareholders of record as of March 4, 2005.
12
Equity Compensation Plan Information
The following table sets forth information about the Company's common
stock that may be issued upon the exercise of options under all of the Company's
equity compensation plans as of March 31, 2005.
- --------------------------------------------------------------------------------------------------------------------------
Number of securities remaining
Number of securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, (excluding securities reflected
warrants and rights warrants and rights in column a)
Plan Category (a) (b) (c)
- --------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,084,722 $27.77 138,150
- --------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total 1,084,722 $27.77 138,150
- --------------------------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Razin, who is Vice President EDI Services of the Company, is the son
of Sheldon Razin, Chairman of the Board. David Razin earned $164,300 in salary
and bonus during the fiscal year ended March 31, 2005. Kim Cline, Vice President
of Client Services, at the Company's NextGen Healthcare Information System
subsidiary, is the sister of Patrick Cline, President of the NextGen Healthcare
Information System Division. Kim Cline earned $147,684 in salary and a bonus
during the fiscal year ended March 31, 2005 and was awarded 37,000 stock options
during the same period.
ITEM 14. PRINCIPAL ACCOUNTING AND FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Company by
Grant Thornton, LLP for the fiscal years ended March 31, 2005 and 2004.
---------------------------------------------------------------
2005 2004
---------------------------------------------------------------
Audit fees $941,000 $250,000
---------------------------------------------------------------
Audit related fees $ 0 $ 0
---------------------------------------------------------------
Tax fees $ 7,000 $ 11,000
---------------------------------------------------------------
All other fees $ 6,000 $ 34,000
---------------------------------------------------------------
The Audit Committee's policy is to preapprove all auditing services and
permitted non-audit services (including the fees and terms thereof) to be
performed for the Company by its independent auditor, subject to the de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of the
Securities Exchange Act of 1934 which are approved by the Audit Committee prior
to the completion of the audit.
13
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 Articles of Incorporation of the Company, as amended, are
hereby incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1984, File No. 2-80056.
3.1.1 Amendment to Articles of Incorporation, effective March 4,
2005. **
3.2 Bylaws of the Company, as amended and restated. **
3.3 Certificate of Amendment of Bylaws of the Company is hereby
incorporated by reference to Exhibit 3.2.1 to the Company's
Registration Statement on Form S-1, File No. 333-00161.
3.4 Text of Sections 2 and 3 of Article II of the Bylaws of the
Company is hereby incorporated By reference to Exhibit 3.2.2
to the Company's Quarterly report on Form 10-QSB for the
period Ended December 31, 1996, File No. 0-13801.
3.5 Certificate of Amendment of Bylaws of the Company, is hereby
incorporated by reference to Exhibit 3.2.3 to the Company's
Annual Report on Form 10-K for the year ended March 31, 2000,
File No. 0-13801.
10.2* 1989 Incentive Stock Option Plan is hereby incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8, File No. 33-31949.
10.2.1* Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, File No. 333-00161.
10.2.2* Form of Non-Qualified Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, File No. 333-00161.
10.3* Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, File No. 2-80056.
10.4* 1993 Deferred Compensation Plan is hereby incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1994, File No.
0-13801.
10.4.2* Profit Sharing and Retirement Plan, as amended, is hereby
incorporated by reference to Exhibit 10.4.2 to the Company's
Annual Report on Form 10-KSB for the year ended March 31,
1994, File No. 0-13801.
14
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.4.3* Profit Sharing and Retirement Plan, as amended, amendments No.
2 and 3, are hereby incorporated by reference to Exhibit
10.4.3 to the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1996, File No. 0-13801.
10.5 Series "A" Convertible Preferred Stock Purchase Agreement, as
amended, dated April 21, 1995 between the Company and Clinitec
International, Inc., is hereby incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-KSB
for the year ended March 31, 1995, File No. 0-13801.
10.6 Form of Indemnification Agreement is hereby incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1, File No. 333-00161.
10.6.1* Form of Indemnification Agreement for directors and executive
officers authorized January 27, 2005. **
10.7 Agreement and Plan of Merger, dated May 16, 1996, by and among
Quality Systems, Inc., CII Acquisition Corporation, Clinitec
International, Inc. and certain shareholders of Clinitec
International, Inc. and certain exhibits are hereby
incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K, dated May 17, 1996 and filed May
30, 1996.
10.8 Asset Purchase Agreement, dated May 15, 1997, by and among
NextGen Healthcare Information Systems, Inc., MHIS Acquisition
Corp., Quality Systems, Inc., and certain shareholders of
NextGen Healthcare Information Systems, Inc. is hereby
incorporated by reference to Exhibit 2 of Company's Current
Report on Form 8-K, dated May 15, 1997 and filed May 29, 1997,
File No. 0-13801.
10.9* 1998 Employee Stock Contribution Plan is hereby incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8, File No. 333-63131.
10.10* 1998 Stock Option Plan is hereby incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-8, File No. 333-67115.
10.10.1* Amended and Restated 1998 Stock Option Plan. **
10.11* Memorandum of Understanding regarding the April 3, 2000
resignation of Sheldon Razin between Sheldon Razin and Quality
Systems, Inc., is hereby incorporated by reference to Exhibit
10.16 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2000, File No. 0-13801.
10.12* Memorandum of Understanding Relating to Director Nominees is
hereby incorporated by reference to Company's Definitive Proxy
Statement for the Company's 1999 Shareholder's Meeting, File
No. 001-12537.
15
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.13* Employment Agreement dated July 20, 2000 between Quality
Systems, Inc. and Lou Silverman is hereby incorporated by
reference to Exhibit 10.18 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000, File
No. 0-13801.
10.14 Lease Agreement between Company and Tower Place, L.P. dated
November 15, 2000, commencing February 5, 2001 is hereby
incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended March 31, 2001,
File No. 0-13801.
10.15 Lease Agreement between Company and Orangewood Business Center
Inc. dated April 3, 2000, amended February 22, 2001, is hereby
incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended March 31, 2001,
File No. 0-13801.
10.16 Lease Agreement between Company and Craig Development
Corporation dated February 20, 2001 is hereby incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended March 31, 2001, File No. 0-13801.
10.17 Sublease Agreement between Company and Infinium Software dated
February 22, 2002 is hereby incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the year ended March 31, 2003, File No. 0-13801.
10.18 Lease Agreement between Company and HUB Properties LLC dated
May 8, 2002 is hereby incorporated by reference to Exhibit
10.18 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-13801.
10.19 Lease Agreement between the Company and LakeShore Towers
Limited Partnership Phase IV, a California limited
partnership, dated September 15, 2004. **
10.20* Board Service Agreement between the Company and Lou Silverman
is incorporated by reference to Exhibit 10.2.1 to our Current
Report of Form 8-K, dated May 31, 2005, File No. 001-12537.
10.21* Board Service Agreement between the Company and Patrick Cline
is incorporated by reference to Exhibit 10.2.1 to the
Company's Current Report of Form 8-K, dated May 31, 2005, File
No. 001-12537.
21 List of Subsidiaries***
23.1 Consent of Independent Registered Public Accounting Firm -
Grant Thornton LLP.
16
EXHIBIT
NUMBER EXHIBIT
- ------ -------
24 Power of Attorney (contained on the signature page to the
initial filing of this Report)**
31.1 Certifications Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. ***
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
* This exhibit is a management contract or a compensatory plan or
arrangement.
** Filed as an exhibit to the initial filing of this Report and
incorporated herein by reference.
*** Filed herewith.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
By: /s/ LOUIS E. SILVERMAN
--------------------------
Louis E. Silverman,
President and Chief Executive Officer
Date: August 9, 2005
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Amendment No. 1 to Form 10-K has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
- ----------------------------- --------------------------------------- --------------
/s/ SHELDON RAZIN* Chairman of the Board August 9, 2005
- -----------------------------
Sheldon Razin
/s/ LOUIS E. SILVERMAN Director, President and Chief Executive
- ----------------------------- Officer (Principal Executive
Louis E. Silverman Officer)/Director August 9, 2005
/s/ PATRICK CLINE* Director, President, NextGen Healthcare
- ----------------------------- Information Systems Division August 9, 2005
Patrick Cline
/s/ PAUL HOLT Secretary and Chief Financial Officer
- ----------------------------- (Principal Financial Officer) August 9, 2005
Paul Holt
/s/ WILLIAM BOTTS* Director August 9, 2005
- -----------------------------
William Botts
/s/ MAURICE DEWALD* Director August 9, 2005
- -----------------------------
Maurice DeWald
Director August 9, 2005
- -----------------------------
Ahmed Hussein
/s/ JONATHAN JAVITT* Director August 9, 2005
- -----------------------------
Jonathan Javitt
/s/ VINCENT LOVE* Director August 9, 2005
- -----------------------------
Vincent Love
/s/ STEVEN PLOCHOCKI* Director August 9, 2005
- -----------------------------
Steven Plochocki
*By: /S/ LOUIS E. SILVERMAN
---------------------------
Louis E. Silverman,
Attorney-In-Fact
18
INDEX TO EXHIBITS FILED WITH THIS AMENDMENT NO. 1 TO FORM 10-K
EXHIBIT
NUMBER EXHIBIT
- ------ -------
21 List of Subsidiaries
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
19